Executive Benefits
Executive benefits are often designed to provide for the executive’s retirement and can also offer tax advantages for the executive and the employer. These benefits are tailored to meet the needs of key employees and usually go beyond what is offered in standard employee benefit packages. They provide the necessary incentives for high-level employees to join and stay with your company.
Provide for your key employees
Executive benefits can help you attract top talent, drive retention and align to your business goals.
How does an executive bonus plan work?
An executive bonus plan using life insurance is a benefit strategy where a business rewards key employees by paying the premiums on a life insurance policy for them. Here’s how it works.
Employer pays the premiums
The company buys a life insurance policy on the employee and pays the premiums, treating it as a bonus to the employee. The company can deduct the premium payments as a business expense, like other bonuses or compensation. The premiums the employer pays are considered taxable income to the employee, so the employee will owe taxes on this amount.
Employee owns the policy
The employee is the owner of the policy, meaning they have control over it and can name their own beneficiaries. The employee’s beneficiaries receive the death benefit if the employee passes away. Additionally, the employee may access the cash value of the policy during their lifetime if they need it.
Double bonus arrangements
In executive bonus plans, the employer might provide a bonus that covers the life insurance premium and the taxes on that bonus, effectively giving the executive a tax-free benefit.
Nonqualified deferred compensation
NQDC plans permit key employees to set aside money over the qualified retirement plan limits. They also enable you to provide a retirement plan for yourself and other key employees without including all employees in the plan.
Life insurance is commonly used to fund a NQDC plan, primarily because of its tax advantages, flexibility and security for both the employer and the employee.
Types of NQDC plans
Traditional deferred compensation
The employee elects to receive future compensation funded from a current salary reduction, deferral of a current bonus or salary increase.
Supplemental executive retirement plan
Entirely sponsored and paid for by the employer, a SERP is an additional benefit beyond current compensation for select key employees to supplement and enhance their retirement income.
401(k) look-alike plan
This plan allows key employees to voluntarily defer their compensation on a tax-deferred basis with employer matching contributions.
-
Tax deferral
Many executive benefits allow executives to defer taxes on their compensation until they receive it, usually at retirement. This can be advantageous if the executive expects to be in a lower tax bracket in retirement.
-
Employer tax deductions
Employers can often deduct the cost of providing certain executive benefits, like bonuses or contributions to a SERP, when those benefits are paid out. This can help manage the company’s tax liability.
How do I get started?
If you think executive benefits might be a good fit for your business and your key employees, reach out to your financial professional or we can help you find one.